The stock market is a popular investment hub for money-minded individuals who wish to radically grow their wealth. But out of all these hopeful investors, only a handful end up cutting it in the stock market while the majority are often left searching for their future in the dirt.
And here’s why. A lot of new investors often have their eyes so fixed on the prize to the extent that they overlook the road that will get them there. The stock market is a popular yet very tricky investment option that often requires tact, agility, strong-will and most importantly, patience. Because at the end of the day, the goal is to make money, but it’s good to know that you can lose it too so as such let me share with you 7 reasons people lose money in the stock market!
Reason #1: Viewing the Stock Market as Quick Financial Fix
The first reason why people suffer crippling losses in the stock market is viewing the market as a get rich quick scheme. You probably know that one stock investor that flaunts flashy cars, lives in a million-dollar mansion, and is always donning a shiny, bespoke suit. Maybe this particular successful stock market guru is the reason you decided to start trading in the first place. But as soon as you start making your first trade, you’ll realize that this successful investor didn’t get rich overnight.
As a matter of fact, the stock market is favorable to investors who are focused on growing their wealth in the long run, unlike those looking to save their sinking financial ships. Through 1997 to 2016, the average trader in the stock market received a return of 3.98% annually, and if you ask me, this isn’t enough to transform your life in one year. This is why most smart investors prefer to own stocks over a long period of time through which they can accumulate significant investment returns.
If you wish to be successful in the stock market, ignore the claims of penny stock strategies and other get rich quick investment pitches. These will only land you in a buying and selling spree that will get you nowhere in the long term. Instead, follow the slow and steady investment road and you’ll be thrilled by the huge difference it will make.
Reason #2: Succumbing To Their Emotions
Now here is the plain truth, trading in the stock market brings with it its own fair share of emotions. I mean, one minute you are making calculated investment moves and before you know it, your stocks’ purchase value is going downhill, and fast. As a new stock market investor, allowing your emotions to make your investment decisions for you will only set you on the path for failure. And this doesn’t mean that you are not allowed to grapple with fear, doubt, over confidence, anxiety, greed, disappointment, and even anger on some occasions.
While all these are pretty much part of the game, you have to learn how to suppress or even control all these mixed feeling before they control you. Fear for example, will have you missing out on a valid trade that would have made a significant difference to your investment portfolio. Over confidence on the other hand, can make you ignore market trends and cycles since you’ll think your predictions are always right. The frustration that comes with a series of market losses can make one to take too much time before bouncing back, which may make them miss out on some great opportunities. Some proven tips of remaining calm even amidst a volatile and scary market is not looking at your portfolio every single day and to detach ego from your trades.
Reason #3: Putting Too Much Focus On Individual Stocks
Moving on, another reason why people lose money in the stock market is overlooking the power of diversification. What this means is that most investors will often put all their eggs in one basket and this leads to over exposure to investment risks. With the stock market being as volatile and unpredictable as it is, the last thing any trader should do is to over-invest in one particular stock.
Even as a new investor you have to realize that owning stocks across different categories of companies is a smarter strategy than opting for one seemingly stable one. As a rule of thumb, never have more than 10%-15% of your portfolio invested in one specific company stock. This is because different stocks have varying potential for rewards and risks, which means that should one or two companies come crashing down, your portfolio will still remain alive and cushioned. On top of that, you’ll find that when one stock in your portfolio is losing its value, another one will witness a reasonable upward swing which will still be a win for you. If you dip both feet in a high risk-high reward stock, you’ll only be exposing yourself to massive losses in case that stock comes crashing down, and this is one of the mistakes that often costs traders.
And diversification isn’t limited to merely owning stocks. Besides investing in different companies, it is also crucial that you pick up varying trading strategies and trading schedules for you to edge against market risks. Exchange traded funds are a good place to start if you’re looking to diversify your investment portfolio in the stock market.
Reason #4: Following The Market Crowd
You want to lose money in the stock market? Then listen to the market crowd and let their noise determine your investment moves. Because here’s the thing. The stock market is chockfull of unnecessary noise and mediocrity from ‘investment gurus’ who claim to have the whole market in their hands. They often look intimidating from a distance, because as expected, they are also the loudest group of traders. For new investors, it is easy to get blinded by this seemingly big, noisy herd that started the game way before you, but before you realize it, you will have made a very costly stock market mistake.
Most novice traders often lack the confidence to venture out on their own when needed, and if you ask me, that is the first step towards failure. If you want to see your money serve you well, develop the critical analytical skills that will help guide your investment moves in the stock market, and leave any other trader’s opinion out of your decision. And in case you didn’t know, you don’t require too many sources of information when trading in the stock market. Besides your gut, the only other trends you need to follow in the stock market are consistent trading patterns and market cycles.
Just because other traders swear by a certain hot stock doesn’t mean you should run in that direction. Additionally, don’t scramble for cheap stocks just because everyone suspects their prices will shoot up in the future. As a matter of fact, some of the greatest trades ever made were a result of investors who chose to go right when everyone was going left, and it made all the difference.
Reason #5: Ignoring Commissions and Hidden Broker Fees
This is the most over looked, yet common reasons why traders lose money in the stock market. You see, trading isn’t free, and it doesn’t matter whether you are a beginner or an expert.
For every trade that you place in the stock market, you pay a commission, which in most cases, is a small percentage of your trade. A 2% commission probably doesn’t look like much from where you stand, but as you place more trades, it will significantly eat up your long-term investment returns.
Assuming you were planning to place a trade worth $6,000 and it costs you $12 to trade, you are technically starting your investment at $5,988, which is already a loss. Besides commissions, you’ll also be paying fees on your investments, more so if you are investing in mutual funds. Mutual funds can have expense ratios as low as 0.35% and as high as 2%. This means that you’ll be paying money every year simply by holding that particular mutual fund. For this reason, it’s advisable to have your hands on information regarding fees involved in buying a fund or placing a trade. On top of that, don’t settle blindly for brokers and investment companies. Go for investment sites or companies with detailed fee structures, so that you can maximize the return on your investment efforts.
Reason #6: Opting Out When the Stock Market Is Tanking
The stock market has different types of investors and one of the most common breed that you’ll come across is the unsteady investor. This is the type that flees a stock when it’s purchase value falls or on some occasions, they completely opt out of the market when it gets a little rough.
This type of investor will often land themselves in the ‘buy high, sell low’ investment outcome, which is the most basic way of losing money in the stock market. Selling off your stock when it depreciates in value is unwise, and just because a stock depreciates doesn’t mean it’s all gloom and doom. Ask any experienced trader and they’ll tell you that screaming headlines and temporary price fluctuations don’t determine a company’s overall performance, especially in the long term.
As an investor who is focused on accumulating superior long term returns, you can’t let short-term outcomes prompt you to make irrational investment decisions. Learn to stick it out and hold your ground even when events don’t seem to favor you. If you want to avoid big losses, learn to buy and sell stocks at the right time. Some signs to look out for when you want to sell your stock for profit are when the stock prices have risen drastically, and when the prices have attained an unsustainable level.
Reason #7: Not Doing Enough Research
Moving on, slacking with your homework is another dire stock market mistake that will make anyone lose money. Basic research is important before making headway in the stock market and for most traders, this crucial part is often left to brokers. Entering the market when you are still green will have you paying ridiculously high prices when purchasing stocks and even worse, buying and selling them at the wrong time.
Before you start trading in the stock market, it is important that you know what you‘re getting yourself into. Have a grasp of the different market cycles, trading patterns, how share prices are developed, and how dividends work. And before betting the ranch on any company, make sure you dive deep into their business models and performance history. Unless you want to your portfolio to suffer damaging losses, don’t let your itch for making your first trade surpass the urgency of undertaking intensive research.
Read investment blogs, especially those that major on the stock market. On top of that, join online investment communities where you can have access to investors who’ve gone down a similar road. Whatever it costs, DO NOT tap into the stock market without prior knowledge on how it works, and when it comes to buying individual stocks, only invest in a company whose model you understand.
So there you have it! Those are the 7 most common reasons why people lose money in the stock market. At the end of day, the goal is to see your investment portfolio grow, and the stock market is one of the best ways to do just that. If you’ve finally decided to set foot into the stock market for long term wealth accumulation, you can’t afford to make any of the mistakes I’ve just mentioned!